In a letter to the president, Yellen said yesterday she would "do my utmost" to make sure that there is a smooth transition to Jerome Powell, who was tapped by Trump on November 2 to become the next Fed leader after the president decided not to offer Yellen a second term.
Yellen's decision gives Trump in his first year in office the chance to fill five positions on the Fed's seven-member board, in addition to picking Powell to be the next Fed chairman.
Board member Lael Brainard will be the only Fed board member not nominated by Trump, meaning his selections will have tremendous influence in setting the country's future monetary policy.
Powell's confirmation hearing is scheduled for next week before the Senate Banking Committee. Powell, at one time the only Republican on the Fed board, is not expected to encounter major hurdles in winning confirmation to the chairman's job. He has been on the Fed board since 2012.
Yellen's four-year term as Fed chair ends on February 3. But she could have chosen to remain on the board until her term as a board member ended in January 2024.
At the moment, the board has three vacancies including the No. 2 spot of vice chairman. The president earlier this year tapped Utah financier Randal Quarles to be vice chairman for supervision.
The administration has not announced selections for the other openings. But last week, the Wall Street Journal reported that Mohammad El-Erian, the former chief executive at Pacific Investment Management Co. (PIMCO), was one of several candidates being considered for the vice chairman's job.
It was also reported that Kansas State Banking Commissioner Michelle Bowman was being considered for the Fed board seat reserved for someone with community banking experience.
Until yesterday, Yellen had been mum on whether she might stay on the Fed board if she did not get another term as chair.
In her letter to Trump, Yellen said it had been "my great privilege and honour" to serve in the Federal Reserve system over three decades, first as a member of the board during the 1990s.
She then served as president of the Fed's San Francisco regional bank, then Fed board vice chairman. In 2014, Yellen succeeded Ben Bernanke to become the first woman to head the US central bank.
"As I prepare to leave the board, I am gratified that the financial system is much stronger than a decade ago, better able to withstand future bouts of instability," she said in her resignation letter. "I am also gratified by the substantial improvements in the economy since the crisis."
Yellen was the first Fed leader not to be offered a second term in four decades. In comments a week before announcing his decision, Trump had suggested that while he held Yellen in high regard, he might want to make his own mark on the central bank by selecting someone else for the top job.
Powell, a lawyer by training, will be the first official without an advanced degree in economics to head up the central bank in four decades.